Wells Fargo Securities media analyst Steven Cahall initiated coverage of the cable distribution sector on Tuesday, citing the businesses’ strength in broadband service, but joining the growing chorus of analysts calling for Comcast to spin off its NBCUniversal programming unit.
Cahall, who already covers cable programmers, initiated the sector with an “overweight” rating on Cable One and Charter; “equal weight” for Altice USA and “underweight” for Comcast.
Cahall expected his rating on Comcast would be controversial, but wrote he arrived at his ‘underweight” rating because he believes that although all of the company’s businesses are good, they’d be better apart.
Several analysts have called for Comcast to spin-off its NBCUniversal unit, and Cahall joined the growing chorus, writing in his report that Comcast’s cable and communications business is “value trapped in an inefficient capital structure.”
He called for the media giant to either sell off the NBCU division, spin it off along with its British satellite TV business Sky, or merge it with another media business. He prefers the third option, suggesting that a merger with WarnerMedia, via reverse Morris Trust, makes the most sense.
He estimated a combined NBCU-WarnerMedia would have an equity value of about $253 billion.
Outside of a NBCU-WarnerMedia deal, Cahall was encouraged by the industry’s consistent broadband subscriber growth, and wrote that declining capital expenditure needs also means that free cash flow generation should remain strong.
“There's a utility nature to Cable that signifies a great space for the long-term investor,” Cahall wrote.
But it was just that broadband strength that could pose problems in the future. The analyst noted the high penetration rates for cable broadband -- about 76% -- estimating it could be even higher (92%) in households with annual income above $25,000.
“Population growth is helping, but we think broadband industry subscriber growth will be modestly decelerating in the years ahead to ~2% by 2022,” Cahall wrote, adding that while average revenue per unit should rise slightly, it will be at a decelerating pace. “Given this, we're picking our spots in Cable and it's no coincidence that our Overweights - Cable One and Charter - have the best passing growth trends.”
Cahall was less concerned about declining pay TV video trends, adding that most cable companies trade off video losses for broadband gains.
“We think the Cable sector has successfully deleveraged stock narratives from pay TV, so we don't view video declines as a significant risk going forward,” he wrote.
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